Singapore Exchange Limited - Phillip Securities 2019-03-20: Derivatives Growth The Slowest In Almost 2 Years

SINGAPORE EXCHANGE LIMITED (SGX:S68) | SGinvestors.io SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange Limited - Derivatives Growth The Slowest In Almost 2 Years

  • HKEX announced the launch of futures contracts on MSCI China A Index.
  • SGX’s February Derivatives Daily Average Volume (DDAV) growth was flat at 1.4% y-o-y, the lowest in almost two years.
  • SGX’s derivatives business accounts for c.49% of total revenue in 6M19.
  • We downgrade to ACCUMULATE at a lower Target Price of S$8.17 (previously S$8.36) and lowered our FY19e earnings by 2%. We peg our Target Price to 23.2x P/E, at SGX’s 5-year mean.



Monthly Statistical Updates

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)'s DDAV growth for January and February contracted to 2.4% y-o-y and 1.4% y-o-y respectively as compared to 24.1% y-o-y jump in 2Q19 (Oct’18 – Dec’18).
  • The recovering global markets at the start of 2019 was a stark contrast to extremely volatile conditions in 2018. As a result, there has been a contraction in derivatives volume due to lower hedging activities. Hence, we cut our forecast for FY19e derivatives revenue growth from 27.4% y-o-y to 22.1% y-o-y.
  • Meanwhile, SDAV showed no signs of recovery and contracted 38.6% y-o-y in February.


Recent Events

  • The Hong Kong Stock Exchange (HKEX) announced on 11 March 2019 its plans to launch futures contracts on the MSCI China A Index, subject to relevant regulatory approvals.
  • The MSCI futures contracts will allow investors to hedge their A-share equity exposures. Currently, SGX’s FTSE China A50 Index Futures is the only offshore futures contract tracking the Chinese A-share market.


Impact on SGX

  • SGX’s derivatives business contributed to 50% of total revenue in 6M19 with the main driver being FTSE China A50 Index Futures which accounted for 43% of total trading volume YTD which puts SGX in a vulnerable position. If HKEX succeeds in its plans to introduce MSCI China A Index futures, SGX could face some competition as some customers will make the switch to HKEX and derivatives revenue might be dampened in the long term.
  • SGX’s China A50 Index futures represents about 13% of total revenue. Assuming SGX loses 50% of its China A50 revenue, the impact to PATMI is around 8%.
  • However, we do not expect HKEX’s plans to have a significant impact on SGX’s derivatives revenue for the FY19-20.
    • Firstly, if HKEX obtains relevant approvals, the launch should be in November 2019.
    • Secondly, HKEX will take months to build up liquidity and onboarding of clients’ systems.
    • Thirdly, SGX’s derivatives platform provides high customer retention due to its
      1. deep liquidity as a first mover;
      2. allows customers to carry out margin offsets across their various derivatives assets;
      3. caters to customers’ needs to hedge currency exposures with SGX’s diverse FX exchange especially the USD-CNH and INR-USD FX futures.


Outlook

  • HKEX’s plans to introduce futures contracts on the MSCI China A Index has been in the works for the past 12-18 months, and the announcement did not come as a surprise for SGX. HKEX’s plans could create a larger ecosystem for China equity derivatives which should deepen liquidity and increase volumes with arbitrage between the exchanges.


Potential Risks

  • Larger than expected switch of customers from SGX to HKEX,
  • quickened regulatory approval timeline for HKEX’s plans, and
  • HKEX competes on pricing.


Potential Catalysts

  • Introduction of new derivative products by SGX;
  • delayed the launch of HKEX’s MSCI China A Index futures;
  • stronger than expected growth in DDAV and SDAV.


Investment Actions

  • We downgrade to ACCUMULATE at a lower Target Price of S$8.17 (previously S$8.36) as we peg our Target Price to an unchanged 23.2x P/E, at SGX’s 5-year mean.
  • The reduction in Target Price was due to our lowered forecast for FY19e derivatives revenue growth from 27.4% y-o-y to 22.1% y-o-y which cut our FY19e earnings by 2%.





Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-03-20
SGX Stock Analyst Report ACCUMULATE DOWNGRADE BUY 8.17 DOWN 8.360



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......